Deals and IPOs

CNOOC’s Failed Unocal Bid Paved Way for Nexen Deal

Sri Jegarajah|Reporter, CNBC Asia Pacific

The memory of  its failed 2005 bid for Unocal still fresh, China's state-controlled CNOOC Ltd. has put lessons learned into practice and "networked strongly" with regulators in Canada and the U.S., smoothing the way for its to  buy Canadian oil producer Nexen Inc.

Getty Images

Energy analysts CNBC spoke to after the deal broke unanimously agreed that China's largest foreign acquisition yet would win regulatory approval from Ottawa. Nexen's asset base isfocused primarily in the Gulf of Mexico and the North Sea, not in Canadian territory, reducing any immediate strategic national interest concerns, they said.

A political backlash in 2005 against Chinese efforts to snap up U.S.-based Unocal for $18.5 billion may have encouraged Chinese firms to tread more carefully as they target foreign assets that could help feed demand in the world’s second-biggest economy.

"The deal size is actually very, very similar to Unocal," Neil Beveridge, Senior Oil Analyst at Sanford C. Bernstein told CNBC's Asia’s “Squawk Box”on Tuesday.

"CNOOC has learned a lesson from the Unocal experience and I think they're likely to have networked very strongly on this deal with the Canadian government and U.S. authorities in advance of putting this bid in. There's a fairly high degree of probability that Canadian regulators will approve this...because of the international nature of these assets," he said.

John Licata, Chief Energy Strategist of Blue Phoenix Inc. noted that Nexen held "over 50 percent of its assets actually in the U.K." That effectively meant CNOOC could bypass Canadian regulatory hurdles "since the assets of interest are largely not on Canadian soil."

And the relatively high break-up fee offered by CNOOC to Nexen of $425 million reflects further confidence "that this deal will in fact move forward and Canada may have to bite its lip and just let the deal happen," Licata said.

Peter Morici, professor at the Robert H. Smith School of Business - University of Maryland was equally confident, saying Canada has a "stringent" review process that's been in place for some 40 years.

"The Canadians have always been conscious of foreign influence in their resource sector but they've had bad experience in limiting foreign ownership and so I think that they will go along with this," Morici told CNBC's “Cash Flow” on Tuesday. "It's not a great idea that it's owned by the entity of the Chinese government, the state owned company."

'Friends From The North'

Phil Flynn, senior market analyst at Price Futures Group, said the CNOOC-Nexen deal will be closely watched across the border in the U.S.

President Barack Obama's energy policy has come under fire after Washington put a hold on the Canada-to-Texas Keystone pipeline in January, saying it needed more environmental reviews because of a change in routing to avoid the ecologically sensitive region of Nebraska.

A Republican lawmaker, who has tried several times to marshal congressional support to speed approval of the Keystone XL crude oil pipeline, is taking another crack at it with a new bill, but said the strategy for moving the plan forward was not yet clear, Reuters reported.

Lee Terry said Monday's announcement that CNOOC plans to buy Nexen, a player in Canada's massive oil sands resource could give political momentum to his latest push. He said the $15.1 billion deal backs Republican arguments that China will dominate Canada's oil resources if the U.S. stalls the Keystone pipeline, designed to ship oil from Albertan oil sands to Texas refineries.

"I do think this matter comes into play in the presidential election as President Obama is seen blocking the Keystone pipeline and now we see China cozying up to our friends from the North," Price Futures Group's Flynn said. "The U.S. stands idle while China is talking control of its energy security and that will play into (U.S. Republican presidential candidate) Mitt Romney's talking points."

Though CNOOC seem confident that the deal will get across the line with the regulators, the company is nonetheless not leaving anything to chance and will retain Nexen's current management, opening offices in Calgary and listing on the Toronto Stock Exchange. 

Calgary "will be the major new hub for CNOOC in North America," Sanford C. Bernstein's Beveridge said, adding that the planned TSX listing "would also give Canadian investors opportunity to buy into this deal post-completion." Beveridge described CNOOC's bid as "opportunistic" and may be perceived as a way of "getting a material position in the Gulf of Mexico by flying under the radar doing it through a Canadian company."

By CNBC's Sri Jegarajah